Issuer officials who said Treasury's final issue price rules are a vast improvement over earlier proposals nevertheless raised concern that they might discourage competitive sales of bonds or create problems for issuers if underwriters run afoul of the rules.

S&P Offers Mea Culpa On Ratings

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WASHINGTON - Standard & Poor's issued a white paper yesterday that embraced increased global oversight of rating agencies, including rules that require "robust" disclosure of rating criteria and methodologies and that address potential conflicts of interest in the ratings process.

The nine-page paper comes as policymakers and financial regulators are considering additional oversight of rating agencies, on the heels of widespread criticism that they provided unduly high ratings to structured mortgage products that fueled the financial crisis. The subject of improved ratings is expected to be a focus at the G-20 Summit in London next month.

In the white paper, Standard & Poor's conceded that many of its ratings issued between 2005 and 2007 for structured products backed by subprime mortgages have "not held up," but it stressed that the "extreme nationwide collapse in the U.S. housing market" was an "unforeseen development" and that it was not the only market player responsible for the crisis.

"Rating agencies and others, including banks, insurance companies, regulators, and policymakers, did not anticipate the full extent of what has become a global recession, fueled by the implosion of the unregulated derivatives market, loose monetary policy, excessive liquidity, and record levels of institutional and personal debt," the white paper said.

The rating agency said that new regulations should require "policies and procedures to address potential conflicts of interest at the institutional and staff levels, including a code of ethics that requires disclosure of potential conflicts, how they are managed, with oversight of the code's effective application for all rating agency business models." Anti-competitive activities should be prohibited, it added.

Though it calls for globally consistent regulation to address conflicts of interest, the white paper does not specifically address the issuer-pays model, under which municipal bond and other issuers pay the credit agencies for their ratings. Securities and Exchange Commission chairwoman Mary Schapiro has said she would like to improve the quality of credit ratings by addressing "the inherent conflicts of interest credit rating agencies face as a result of their compensation model."

In an interview, Standard & Poor's officials said that they have always been in favor of regulations that separate the commercial aspects of the rating business from its analytical components. They also stressed that every business model has potential conflicts, but said the important question is how the rating agencies manage those conflicts and prevent them from leading to biased ratings.

"The key issue is not which model but being transparent about it, and regulation can help by providing transparency to rules and policy requirements around conflicts of interest and disclosure," said Rita Bolger, Standard & Poor's senior vice president of global regulatory affairs.

In the paper, the agency also said that ratings on new and different securities should be differentiated to allow markets to better understand the meaning of ratings on new and complex securities, including structured finance ratings, and how they differ from traditional ratings.

That suggestion appears to reflect rules proposed by the SEC last year - which have yet to be voted on - that would require the ratings for structured products to include symbols or attachments of lengthy reports so that investors could better differentiate them from other securities. Those proposals drew strong opposition from the securities industry, which warned they would scare off or confuse investors.

David Weinfurter, managing director of Fitch Ratings, said his firm "has long acknowledged that there will be enhanced regulatory frameworks," and that it has "already implemented a wide range of analytical, organizational, and procedural initiatives to enhance the reliability, transparency, and independence of the ratings process."

Tony Mirenda, a spokesman for Moody's Investors Service, said the agency "remains committed to the dialogue we have established with the regulatory community" and "welcome[s] initiatives that enhance ratings quality and improve transparency."